Yesterday's business news was filled with various reports concerning the federal government's big Fannie/Freddie conference.
Perhaps the most misrepresented and self-serving of all the comments on the event belonged to PIMCO senior executive Bill Gross.
Appearing on CNBC in the afternoon, after apparently making his views known at/to the conference, Gross, almost alone among financial market participants and pundits, declared that the feds must do more in mortgage finance through Fannie and Freddie, not less.
At least Susan Wachter, whom I remember from my days at Wharton, acknowledged that a GSE-free mortgage market was preferable. But she simply contended it was, for at least the next half-decade, simply no longer feasible.
But Gross went much, much further.
As the guy who is primarily responsible for PIMCO's reportedly huge inventory of GSE paper, he went all in to protect his career and investors, insisting that government guarantees of Fannie and Freddie paper be ironclad, continuing and even more generous in the future.
The amazing part is how reverentially CNBC's anchors treated Gross during his appearance. They lobbed softballs at him, carefully avoiding mention of how he is simply lobbying to protect his book, nevermind the overall health of the financial markets. Instead of exposing this bias, they treat Gross as some sort of expert pundit on the matter.
Why? Probably access. If anyone on CNBC ever really challenged Gross' comments and positions for being as self-serving as they are, he'd likely never return. Then CNBC would be shut out of interviews with the most senior guy at what is arguably the largest, or one of the largest, fixed-income holders of all institutional investors.
So, to retain access, CNBC's on air staff turn a blind eye to Gross' obvious biases when he comments on the structure of the US residential finance sector.
Showing posts with label Securitization. Show all posts
Showing posts with label Securitization. Show all posts
Wednesday, August 18, 2010
Saturday, September 27, 2008
American CDOs Are Not The Same As Japan's Bad Bank Loans of the 1990s
Many people seem to be confused about the role that 'mark to market' accounting has played in the current US financial services sector debacle.
No less than two former leading lights of US financial regulation, Arthur Levitt, former SEC chairman, and Lynn Turner, the agency's former chief accountant, both of whom retired in 2001, wrote an editorial in the Wall Street Journal yesterday on the subject.
As you might expect, they lecture on why anything but that method of valuation misleads investors.
Another frequent analogy is made to Japan and its famous 'lost decade' of the 1990s, due to the false valuation of nonperforming bank loans allowed to remain on bank balance sheets at face value.
Allow me to dispel these myths. Especially the second one.
Levitt and Turner are correct in their assertion that full information on the true value of an asset is essential for investors, in order that they can make informed investment decisions with respect to the value of a firm with questionable assets on its balance sheet.
However, they cannot wave away, as if with some magic wand, the real disparity between two values of a performing (or, in some cases, even a non-performing) asset: the current market price at which the asset can be sold, and the present value of the economic performance of the asset when held to maturity, or for a very long duration.
It is as wrong to penalize owners of a firm whose performing assets, though expected to be held to maturity, are currently valued at a far lower value in the market, by forcing them to value those assets at the current 'liquidation' value, as it is to overstate asset values by denying their nonperforming status.
In the case of Japan, non-performing bank loans were held on bank balance sheets at their full value, overstating the banks' values and causing severe counterparty risk. Their financial system froze up due to these inflated values of non-performing loans.
The current dilemma in the US concerns securitized, structured financial instruments backed by residential mortgage loans.
Because the securities are artificial creations composed of mixes of payments from many underlying mortgages, investors are now concerned that it is difficult, if not impossible, to discern which CDOs are relying on payments from delinquent or defaulting mortgage loans, or loans likely to default. Thus, a counterparty risk has arisen which is depressing the 'liquidation' value of such CDOs.
But nobody disputes that most of these CDOs are, in fact, still 'performing.' Their economic value, held to maturity, is quite high. Far higher than the immediate market liquidation value.
Unlike Japan's clearly non-performing bank loans, most of the mortgages underlying the outstanding CDOs are performing.
Yes, a percentage of the underlying mortgage loans will become non-performing. Some were 'alt-A' or 'subprime,' and will have a higher-than-average default rate. But it won't be 100%.
Thus, there is no comparison whatsoever between the Japanese experience with bad, non-performing bank loans in the 1990s, and American mortgage loans in this decade, most of which are, in fact, still and expected to be, performing.
Levitt and Turner are incorrect to suggest that investors may only be misled by overstated values of performing assets whose immediate, liquidation values are depressed due to factors not related to the actual performance of the assets.
Assets such as CDOs can be performing, but valued much lower for immediate sale, due to a general misperception of the true percentage of non-performance in the asset class, and the inability to distinguish which are non-performing at this time.
That doesn't mean that a firm wishing to hold performing CDOs to maturity owns an asset which is, for the purposes of that firm's use of the asset, worth only its liquidation value.
No less than two former leading lights of US financial regulation, Arthur Levitt, former SEC chairman, and Lynn Turner, the agency's former chief accountant, both of whom retired in 2001, wrote an editorial in the Wall Street Journal yesterday on the subject.
As you might expect, they lecture on why anything but that method of valuation misleads investors.
Another frequent analogy is made to Japan and its famous 'lost decade' of the 1990s, due to the false valuation of nonperforming bank loans allowed to remain on bank balance sheets at face value.
Allow me to dispel these myths. Especially the second one.
Levitt and Turner are correct in their assertion that full information on the true value of an asset is essential for investors, in order that they can make informed investment decisions with respect to the value of a firm with questionable assets on its balance sheet.
However, they cannot wave away, as if with some magic wand, the real disparity between two values of a performing (or, in some cases, even a non-performing) asset: the current market price at which the asset can be sold, and the present value of the economic performance of the asset when held to maturity, or for a very long duration.
It is as wrong to penalize owners of a firm whose performing assets, though expected to be held to maturity, are currently valued at a far lower value in the market, by forcing them to value those assets at the current 'liquidation' value, as it is to overstate asset values by denying their nonperforming status.
In the case of Japan, non-performing bank loans were held on bank balance sheets at their full value, overstating the banks' values and causing severe counterparty risk. Their financial system froze up due to these inflated values of non-performing loans.
The current dilemma in the US concerns securitized, structured financial instruments backed by residential mortgage loans.
Because the securities are artificial creations composed of mixes of payments from many underlying mortgages, investors are now concerned that it is difficult, if not impossible, to discern which CDOs are relying on payments from delinquent or defaulting mortgage loans, or loans likely to default. Thus, a counterparty risk has arisen which is depressing the 'liquidation' value of such CDOs.
But nobody disputes that most of these CDOs are, in fact, still 'performing.' Their economic value, held to maturity, is quite high. Far higher than the immediate market liquidation value.
Unlike Japan's clearly non-performing bank loans, most of the mortgages underlying the outstanding CDOs are performing.
Yes, a percentage of the underlying mortgage loans will become non-performing. Some were 'alt-A' or 'subprime,' and will have a higher-than-average default rate. But it won't be 100%.
Thus, there is no comparison whatsoever between the Japanese experience with bad, non-performing bank loans in the 1990s, and American mortgage loans in this decade, most of which are, in fact, still and expected to be, performing.
Levitt and Turner are incorrect to suggest that investors may only be misled by overstated values of performing assets whose immediate, liquidation values are depressed due to factors not related to the actual performance of the assets.
Assets such as CDOs can be performing, but valued much lower for immediate sale, due to a general misperception of the true percentage of non-performance in the asset class, and the inability to distinguish which are non-performing at this time.
That doesn't mean that a firm wishing to hold performing CDOs to maturity owns an asset which is, for the purposes of that firm's use of the asset, worth only its liquidation value.
Thursday, May 29, 2008
Details...Details...What's In The Boilerplate Of Those Securities?
Yesterday's Wall Street Journal's Money & Investing section featured an article discussing the putting back of bad mortgages by institutional investors to sellers of the instruments.
The article cites Countrywide Financial as having reset its liability for such repurchased bad mortgages from $365Mm last year to $935MM now.
According to the Journal article,
"Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January...MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. "There are a significant number of loans that should not have been in these pools to begin with," says Mitch Sonkin, MBIA's head of insured portfolio management."
Further on, the article relates that WMC Mortgage, a unit of GE, made improper representations and warranties of subprime loans it pooled which PMI insured. Essentially, PMI is suing GE's unit for fraudulently describing the loans, for which PMI charged a fee to insure, because, in reality, the loans were much riskier than had been represented to PMI. PMI also wants WMC to repurchase the loans or pay damages to PMI, as the delinquency rate on the loans rose 30% within eight months.
What I find comforting, on some level, is that the legal agreements underpinning various mortgage loan and securitization instruments allow for buyers and insurers to recover for fraud and breach of contract, putting back the misrepresented instruments to the sellers.
Somewhere, in a handful of Wall Street investment banks, i.e., the few still solvent and publicly-owned, I can imagine rooms full of young financial wunderkinds being taught a lesson about the real meaning of those thick piles of documentation that accompany traded, securitized loans.
Buying a security that is what it says it is, and losing money, is one thing. Buying a fraudulently-described mortgage-backed security is quite a different matter. It's good to see that astute buyers are forcing the sellers to take back their fraudulently conveyed paper.
I wonder how much more in losses than currently expected this will bring to the larger mortgage-backed securitizers of the last few years.
The article cites Countrywide Financial as having reset its liability for such repurchased bad mortgages from $365Mm last year to $935MM now.
According to the Journal article,
"Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January...MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. "There are a significant number of loans that should not have been in these pools to begin with," says Mitch Sonkin, MBIA's head of insured portfolio management."
Further on, the article relates that WMC Mortgage, a unit of GE, made improper representations and warranties of subprime loans it pooled which PMI insured. Essentially, PMI is suing GE's unit for fraudulently describing the loans, for which PMI charged a fee to insure, because, in reality, the loans were much riskier than had been represented to PMI. PMI also wants WMC to repurchase the loans or pay damages to PMI, as the delinquency rate on the loans rose 30% within eight months.
What I find comforting, on some level, is that the legal agreements underpinning various mortgage loan and securitization instruments allow for buyers and insurers to recover for fraud and breach of contract, putting back the misrepresented instruments to the sellers.
Somewhere, in a handful of Wall Street investment banks, i.e., the few still solvent and publicly-owned, I can imagine rooms full of young financial wunderkinds being taught a lesson about the real meaning of those thick piles of documentation that accompany traded, securitized loans.
Buying a security that is what it says it is, and losing money, is one thing. Buying a fraudulently-described mortgage-backed security is quite a different matter. It's good to see that astute buyers are forcing the sellers to take back their fraudulently conveyed paper.
I wonder how much more in losses than currently expected this will bring to the larger mortgage-backed securitizers of the last few years.
Thursday, March 27, 2008
Ethan Penner's Misunderstanding of Mortgage Lending
Yesterday's Wall Street Journal featured an editorial by Ethan Penner, one-time head of Nomura's mortgage business, entitled "Of Markets and Mortgages."
So Penner is about to disabuse us of the two major notions for repairing the current damage from bad lending and exotic structured finance instruments.
First, he deals with mark-to-market, opining,
"The desire to abandon or deemphasize the mark-to-market model is based upon the logic that, if the public didn't know how bad things were, then the all-important confidence in the system would not be at risk and we would be safer. The price to be paid -- the complete obfuscation of the truth -- is simply way too large."
That's it! Penner simply states, without any supporting statistical or other quantitative, descriptive evidence, that the reason we can't modify or adapt 'mark-to-market' is because it would result in 'complete obfuscation of the truth.'
But is that really true? What about the commercial bank investment account? We've lived with that for decades, and still do. Has that brought down our financial system? No.
Sometimes, when an instrument is truly held for income, to perpetuity, or for a long time, the current market value does not represent the value of the instrument to the holder. This could well be true for many institutional investors, especially pension funds, who hold structured finance instruments.
There are provisions for accounting for the value of such instruments by banks when the no longer perform, i.e., become delinquent or in default. But performing instruments thus benefit from a lack of pressure by markets to affect valuation decisions on performing instruments.
Penner then moves to defend his special co-contribution to our current finance system, the securitized mortgage,
"The argument in favor of portfolio lending is based upon the notion that, unlike securitization, portfolio lending incorporates the discipline of "skin in the game." Since, in the portfolio lending model, the loan's risk is not being transferred from the originator/lender, underwriters will therefore be more careful. But the anecdotal evidence just does not support this thesis. In the last major credit correction, it was portfolio lenders who violated prudent credit standards. And in this correction, many of the world's portfolio lenders are suffering the largest writedowns because of their bad credit decisions. Simply put, human nature exploits both models -- securitization and portfolio lending."
I believe Penner's 'analysis,' again, woefully devoid of any quantitative descriptions or statistics to support his weighty contentions, falls short on two counts.
First, I take issue with the 'fact' that 'many of the world's portfolio lenders are suffering the largest writedowns because of their bad credit decisions.' That rings false to me.
Merrill Lynch, Bear Stearns and Morgan Stanley took most of their write-offs from securities, not home loans. I don't recall specifically if Merrill's housing finance unit actually originated subprimes or not, but it clearly bought the unit to securitize the loans, not hold them. After all, Merrill could never use a commercial bank's 'investment account' approach to valuation, so it's unlikely they ever expected to hold any mortgage loans, as such. Even Citigroup's large SIV losses involved securitized mortgages, not the raw material.
Penner is simply deficient on this point. Without numbers to support his positions, I find them unbelievable.
His second error is less visible, but equally important. Penner glosses over why securitization is so much worse than experiencing the same dollar losses in portfolio lending.
The obvious first reason is that, with a bad bank portfolio, you know where the damage is. It's contained to a set amount within a known institution. Usually, FDIC-insured and Fed-supervised. Thus, arrangements to handle the losses and insulate the financial system, and depositors, from the fallout, are relatively easy and conventional.
When the mortgage losses bleed through countless tranches of countless CDOs scattered among investors worldwide, it's literally impossible to know the extent of the loss for each instrument and each (counter)party.
Thus, the uncertainty of the extent of loss for each participant becomes more important than the dollar value of the losses, because, with losses presumed to be resident somewhere, counterparty risk uncertainty skyrockets.
A useful, if unappetizing analogy, involves sewage systems. Which, sadly, appropriately represent much of the material 'pumped through' our financial system for the past few years.
Portfolio lenders essentially have individual septic systems. If they toss in the wrong material and or exceed the capacity of their own system, they suffer. But relevant regulatory and municipal officials can handle the damage and supervise remedies. Nobody else suffers very much, or for long.
Securitizing mortgages, especially suspect ones like subprimes, more closely resembles a situation in which each securitizer reaps a fee for pumping effluent into a common cesspool.
However, once the effluent leaves the securitizer's effluent outflow into the cesspool, the identity of its 'product' is masked. In fact, nobody knows exactly what, in total, is in the cesspool.
And since no one securitizer 'owns' the cesspool, none of them really care about its status. They are paid for pumping the maximum amount of effluent into the cesspool that they can, not for supervising the functioning of the cesspool.
Unless the operator, if there is one, of said cesspool charges an escrow fee by monitoring the effluent feeds into it, there's no negative consequence to the securitizer's if, one day, the cesspool closes, or otherwise becomes inoperable.
Penner ignores the greater motive of humans to misuse and abuse commonly-accessible resources, i.e., the cesspool-cum-financial markets, as opposed to at least trying to risk-manage their own asset portfolios.
Thus, prior mortgage-lending related bubbles and aftermaths have been relatively more easily cleaned up than this one has been.
Because we don't have 'owners' of markets, the cleanup is vastly different. In part, too, because investors may visit a market, buy some CDO, then leave, not being really 'in' the market anymore.
The insidious nature of distributed CDOs containing bad mortgages has had the most deleterious effect on our markets, not simply the size of the delinquencies or defaults.
This lack of knowledge of who might hold bad CDO paper is what has caused the credit market seizures- the implied or suspect counterparty risk.
None of this is evident, nor mentioned, in Penner's defense of the business he says he helped create.
No surprise there, eh?
Penner begins his defense of securitization, which is what his editorial really stresses, with this passage,
"Yet today we see the search for quick fixes and for villains, with securitization being identified as the chief culprit. Securitization is not the cause of the massive problems in our credit markets. The problems are due to basic mistakes that even the most unsophisticated among us can grasp. Lenders loaned too much money on too easy terms to borrowers who did not have the capacity to make their payments. No alchemy by even the brightest minds on Wall Street could turn bad loans into good assets. Sound simple? It really is."
What Penner writes is true. Unsound lending was and is at the core of the mortgage-related finance troubles. But he fails to note that much of the worst of the lending, the 'no money down' mortgages, were not intended to be held in portfolio, but securitized ASAP.
Penner continues in this vein a few paragraphs on, stating,
"The underwriting of risk in the past few years has, of course, not been so good, and securities backed by poorly underwritten loans are losing value daily. Yet the cry for systemic fixes from various constituencies has been dangerously off the mark. One common fix advocated is to abandon or de-emphasize mark-to-market accounting in favor of allowing companies to estimate an asset's "true" long-term intrinsic value. Another is to move away from securitization and return to a portfolio lending model -- where, for example, the bank originating a mortgage keeps it (in its own portfolio of assets), rather than selling it to a third party (as in securitization). Both fixes are tempting. Both are mistaken."So Penner is about to disabuse us of the two major notions for repairing the current damage from bad lending and exotic structured finance instruments.
First, he deals with mark-to-market, opining,
"The desire to abandon or deemphasize the mark-to-market model is based upon the logic that, if the public didn't know how bad things were, then the all-important confidence in the system would not be at risk and we would be safer. The price to be paid -- the complete obfuscation of the truth -- is simply way too large."
That's it! Penner simply states, without any supporting statistical or other quantitative, descriptive evidence, that the reason we can't modify or adapt 'mark-to-market' is because it would result in 'complete obfuscation of the truth.'
But is that really true? What about the commercial bank investment account? We've lived with that for decades, and still do. Has that brought down our financial system? No.
Sometimes, when an instrument is truly held for income, to perpetuity, or for a long time, the current market value does not represent the value of the instrument to the holder. This could well be true for many institutional investors, especially pension funds, who hold structured finance instruments.
There are provisions for accounting for the value of such instruments by banks when the no longer perform, i.e., become delinquent or in default. But performing instruments thus benefit from a lack of pressure by markets to affect valuation decisions on performing instruments.
Penner then moves to defend his special co-contribution to our current finance system, the securitized mortgage,
"The argument in favor of portfolio lending is based upon the notion that, unlike securitization, portfolio lending incorporates the discipline of "skin in the game." Since, in the portfolio lending model, the loan's risk is not being transferred from the originator/lender, underwriters will therefore be more careful. But the anecdotal evidence just does not support this thesis. In the last major credit correction, it was portfolio lenders who violated prudent credit standards. And in this correction, many of the world's portfolio lenders are suffering the largest writedowns because of their bad credit decisions. Simply put, human nature exploits both models -- securitization and portfolio lending."
I believe Penner's 'analysis,' again, woefully devoid of any quantitative descriptions or statistics to support his weighty contentions, falls short on two counts.
First, I take issue with the 'fact' that 'many of the world's portfolio lenders are suffering the largest writedowns because of their bad credit decisions.' That rings false to me.
Merrill Lynch, Bear Stearns and Morgan Stanley took most of their write-offs from securities, not home loans. I don't recall specifically if Merrill's housing finance unit actually originated subprimes or not, but it clearly bought the unit to securitize the loans, not hold them. After all, Merrill could never use a commercial bank's 'investment account' approach to valuation, so it's unlikely they ever expected to hold any mortgage loans, as such. Even Citigroup's large SIV losses involved securitized mortgages, not the raw material.
Penner is simply deficient on this point. Without numbers to support his positions, I find them unbelievable.
His second error is less visible, but equally important. Penner glosses over why securitization is so much worse than experiencing the same dollar losses in portfolio lending.
The obvious first reason is that, with a bad bank portfolio, you know where the damage is. It's contained to a set amount within a known institution. Usually, FDIC-insured and Fed-supervised. Thus, arrangements to handle the losses and insulate the financial system, and depositors, from the fallout, are relatively easy and conventional.
When the mortgage losses bleed through countless tranches of countless CDOs scattered among investors worldwide, it's literally impossible to know the extent of the loss for each instrument and each (counter)party.
Thus, the uncertainty of the extent of loss for each participant becomes more important than the dollar value of the losses, because, with losses presumed to be resident somewhere, counterparty risk uncertainty skyrockets.
A useful, if unappetizing analogy, involves sewage systems. Which, sadly, appropriately represent much of the material 'pumped through' our financial system for the past few years.
Portfolio lenders essentially have individual septic systems. If they toss in the wrong material and or exceed the capacity of their own system, they suffer. But relevant regulatory and municipal officials can handle the damage and supervise remedies. Nobody else suffers very much, or for long.
Securitizing mortgages, especially suspect ones like subprimes, more closely resembles a situation in which each securitizer reaps a fee for pumping effluent into a common cesspool.
However, once the effluent leaves the securitizer's effluent outflow into the cesspool, the identity of its 'product' is masked. In fact, nobody knows exactly what, in total, is in the cesspool.
And since no one securitizer 'owns' the cesspool, none of them really care about its status. They are paid for pumping the maximum amount of effluent into the cesspool that they can, not for supervising the functioning of the cesspool.
Unless the operator, if there is one, of said cesspool charges an escrow fee by monitoring the effluent feeds into it, there's no negative consequence to the securitizer's if, one day, the cesspool closes, or otherwise becomes inoperable.
Penner ignores the greater motive of humans to misuse and abuse commonly-accessible resources, i.e., the cesspool-cum-financial markets, as opposed to at least trying to risk-manage their own asset portfolios.
Thus, prior mortgage-lending related bubbles and aftermaths have been relatively more easily cleaned up than this one has been.
Because we don't have 'owners' of markets, the cleanup is vastly different. In part, too, because investors may visit a market, buy some CDO, then leave, not being really 'in' the market anymore.
The insidious nature of distributed CDOs containing bad mortgages has had the most deleterious effect on our markets, not simply the size of the delinquencies or defaults.
This lack of knowledge of who might hold bad CDO paper is what has caused the credit market seizures- the implied or suspect counterparty risk.
None of this is evident, nor mentioned, in Penner's defense of the business he says he helped create.
No surprise there, eh?
Monday, December 24, 2007
The 2007 Financial Debacle- It Could Have Been Much Worse
As bad as the mortgage-related travails of 2997 have been for the financial services sector, particularly the commercial banks, it could have been so much worse.
For instance, as I wrote here, in August, commenting on a Wall Street Journal article tracing one family's mortgage,
"What I saw in this article is an example of people who should have waited until they actually had the money for a reasonable down payment, and then should have been more sanguine about their prospects of affording the mortgage they chose. Additionally, they seem gullible, in that they simply believed a mortgage broker's promise that they could refinance the mortgage. Perhaps they should have planned on affording the one for which they applied?
The broker, of course, hardly did anyone a favor by putting the Monteses into a barely-affordable mortgage. The institution which lent the money for the house didn't seem to have done a very careful job stress testing the Montes' ability to afford the mortgage.Then the loan was likely bundled up into a security. I don't know what the 'seasoning' period is nowadays, but years ago, lenders typically had to hold their mortgage loans for a year, if I'm not mistaken, before other investors would buy them in CMOs.
This story displays a shocking tale of greed and overreaching on everyone's part, including the Monteses. They should never have expected, in their financial position, with other loans to service, to be paying as much as 42% of their income for housing, before taxes and insurance.It's no wonder that this is the last year of the housing expansion. With loans like these, to borrowers like these, it was clearly time for mortgage merry-go-round to stop. I can't honestly express any sympathy for investors who purchased instruments backed by loans like those of the Montes.'
This was a total lending, underwriting and investing system failure. But it's not a banking failure, per se. Those who bought these loans, packaged as whatever, deserve the losses they take, just as if they had made unwise equity or currency investments."
The current structure of the mortgage finance system should have been a signal to institutional investors that times have changed. As I further observed in this October post,
"The passage in Wednesday's Journal article citing the importance of the SIV sector, "at its peak....about 30 funds....$400 billion in assets," causes me to ponder how the three largest commercial banks- Citigroup, Chase, and BofA- and perhaps a few more, would have managed the mortgage assets on their own balance sheets a decade ago.
Back then, the largest banks built or bought large mortgage origination businesses, feeding into the banks' own large lending portfolios. The rise of securitization, with its liquidity and market-based risk pricing, made it economically feasible and sensible for the commercial banks to cede the portfolio lending business to a market of CMOs and, now, CDOs.
If the commercial banks had remained portfolio lenders, would this current SIV sector have reached $400B in assets? Or would the risk management functions of the banks have slowed as the mortgages began to decline in quality, hitting the sub-prime market? For example, one-time high-flying manufactured housing lender Green Tree Financial was rescued by an Indiana-based insurer, not a commercial bank.
As inept and stodgy as commercial banks can be, including their own prior mortgage lending problems which helped lead to the RTC creation to clean up the last housing finance mess, I think they perhaps exercise a bit more focused risk oversight than a widespread free market in CDOs."
My own belief is that we should be thankful that securitization has prevented the largest US commercial banks from taking more losses than they already have. Rather than being in the tens of billions of dollars, I believe we would have seen at least one, and probably two of the largest five US banks collapse.
As it was, the banks' formations of SIVs in which to ostensibly park mortgage-backed securities at arms' length from the commercial banks' own balance sheets should have given pause to the institutional investors who bought the notes backing them.
Portfolio lending, while worse than financial markets at correctly pricing risk, does, on the other hand, tend to exert an attenuating effect on a commercial bank's risk positions. A mortgage lending unit can afford to underwrite riskier loans when it knows they will be securitized and sold to investors.
This is simply common sense. That commercial banks have experienced severe losses from CDO tranches they kept tells you they would have experienced even worse losses, had they kept everything they underwrote.
As I see it, the various players in the financial services sector have all gotten what they deserved from playing a form of 'hot potato' with risky mortgage lending.
Mortgage brokers will probably become heavily regulated. Commercial banks are now exercising the kind of credit judgment that they used to when they held most of their mortgages in portfolio. Investors and traders have sustained losses by failing to recognize the new risks inherent in buying structured mortgage-backed instruments that weren't retained by the firms which underwrote the original loans.
What has become clearer over the past few months, including this Christmas season, is that the losses and effects felt in the US financial sector isn't spreading to the rest of the economy's sectors, as so many pundits have predicted since August. Recent consumer spending data, and continuing job and incomes growth would seem to testify to a healthy economy, outside of the self-inflicted damage of the financial sector.
Yes, I think things could have been much, much worse. If not for securitization, much of the risky mortgage loan volumes, though perhaps less in the aggregate, would have remained on commercial bank balance sheets, causing a few total failures.
Thanks to our sophisticated financial markets, those investors and traders who believed they knew how to assess and price risk have borne most of the losses. As such, the few hundreds of billions of dollars of ultimate losses from these bad mortgage loans will appear as simply more investment losses, rather than economy-crippling contractions in bank credit markets.
For instance, as I wrote here, in August, commenting on a Wall Street Journal article tracing one family's mortgage,
"What I saw in this article is an example of people who should have waited until they actually had the money for a reasonable down payment, and then should have been more sanguine about their prospects of affording the mortgage they chose. Additionally, they seem gullible, in that they simply believed a mortgage broker's promise that they could refinance the mortgage. Perhaps they should have planned on affording the one for which they applied?
The broker, of course, hardly did anyone a favor by putting the Monteses into a barely-affordable mortgage. The institution which lent the money for the house didn't seem to have done a very careful job stress testing the Montes' ability to afford the mortgage.Then the loan was likely bundled up into a security. I don't know what the 'seasoning' period is nowadays, but years ago, lenders typically had to hold their mortgage loans for a year, if I'm not mistaken, before other investors would buy them in CMOs.
This story displays a shocking tale of greed and overreaching on everyone's part, including the Monteses. They should never have expected, in their financial position, with other loans to service, to be paying as much as 42% of their income for housing, before taxes and insurance.It's no wonder that this is the last year of the housing expansion. With loans like these, to borrowers like these, it was clearly time for mortgage merry-go-round to stop. I can't honestly express any sympathy for investors who purchased instruments backed by loans like those of the Montes.'
This was a total lending, underwriting and investing system failure. But it's not a banking failure, per se. Those who bought these loans, packaged as whatever, deserve the losses they take, just as if they had made unwise equity or currency investments."
The current structure of the mortgage finance system should have been a signal to institutional investors that times have changed. As I further observed in this October post,
"The passage in Wednesday's Journal article citing the importance of the SIV sector, "at its peak....about 30 funds....$400 billion in assets," causes me to ponder how the three largest commercial banks- Citigroup, Chase, and BofA- and perhaps a few more, would have managed the mortgage assets on their own balance sheets a decade ago.
Back then, the largest banks built or bought large mortgage origination businesses, feeding into the banks' own large lending portfolios. The rise of securitization, with its liquidity and market-based risk pricing, made it economically feasible and sensible for the commercial banks to cede the portfolio lending business to a market of CMOs and, now, CDOs.
If the commercial banks had remained portfolio lenders, would this current SIV sector have reached $400B in assets? Or would the risk management functions of the banks have slowed as the mortgages began to decline in quality, hitting the sub-prime market? For example, one-time high-flying manufactured housing lender Green Tree Financial was rescued by an Indiana-based insurer, not a commercial bank.
As inept and stodgy as commercial banks can be, including their own prior mortgage lending problems which helped lead to the RTC creation to clean up the last housing finance mess, I think they perhaps exercise a bit more focused risk oversight than a widespread free market in CDOs."
My own belief is that we should be thankful that securitization has prevented the largest US commercial banks from taking more losses than they already have. Rather than being in the tens of billions of dollars, I believe we would have seen at least one, and probably two of the largest five US banks collapse.
As it was, the banks' formations of SIVs in which to ostensibly park mortgage-backed securities at arms' length from the commercial banks' own balance sheets should have given pause to the institutional investors who bought the notes backing them.
Portfolio lending, while worse than financial markets at correctly pricing risk, does, on the other hand, tend to exert an attenuating effect on a commercial bank's risk positions. A mortgage lending unit can afford to underwrite riskier loans when it knows they will be securitized and sold to investors.
This is simply common sense. That commercial banks have experienced severe losses from CDO tranches they kept tells you they would have experienced even worse losses, had they kept everything they underwrote.
As I see it, the various players in the financial services sector have all gotten what they deserved from playing a form of 'hot potato' with risky mortgage lending.
Mortgage brokers will probably become heavily regulated. Commercial banks are now exercising the kind of credit judgment that they used to when they held most of their mortgages in portfolio. Investors and traders have sustained losses by failing to recognize the new risks inherent in buying structured mortgage-backed instruments that weren't retained by the firms which underwrote the original loans.
What has become clearer over the past few months, including this Christmas season, is that the losses and effects felt in the US financial sector isn't spreading to the rest of the economy's sectors, as so many pundits have predicted since August. Recent consumer spending data, and continuing job and incomes growth would seem to testify to a healthy economy, outside of the self-inflicted damage of the financial sector.
Yes, I think things could have been much, much worse. If not for securitization, much of the risky mortgage loan volumes, though perhaps less in the aggregate, would have remained on commercial bank balance sheets, causing a few total failures.
Thanks to our sophisticated financial markets, those investors and traders who believed they knew how to assess and price risk have borne most of the losses. As such, the few hundreds of billions of dollars of ultimate losses from these bad mortgage loans will appear as simply more investment losses, rather than economy-crippling contractions in bank credit markets.
Friday, October 26, 2007
More on The M-LEC and SIVs
A Wednesday Wall Street Journal article in the Money & Investing section, entitled "SIV Situation: Will Rescuers Arrive in Time?" confirms my understanding and diagnosis of the SIV situation, as I described in a post here recently.
These are some of the issues which I mentioned in my initial piece on this topic last week, providing more reinforcement for my views on this evolving financial services issue.
As a former Chase Manhattan corporate strategist, I can't but help muse about how these events have been triggered by the last decade's evolutions in commercial banking roles. As I wrote here, last month, concerning another article appearing in the Wall Street Journal,
"But a larger issue struck me in this piece. Maybe credit markets went too far in their evolution to total market pricing of credit and debt.
Commercial banks seem, after all, to have a few advantages that were unapparent in a consistently up-market.
Could it be that, rather than a uni-directional march toward market pricing and underwriting, credit markets are, in reality, about to swing between extremes? Moving from all-bank balance sheet valuation and warehousing, to heavily market-priced and securitized, and now back toward the original pole of bank-sourced and distributed credit instruments?
It's not something I've read anyone else hypothesizing. Even I just assumed that banks had pretty much become a mere origination platform for credit.
Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?"
The passage in Wednesday's Journal article citing the importance of the SIV sector, "at its peak....about 30 funds....$400 billion in assets," causes me to ponder how the three largest commercial banks- Citigroup, Chase, and BofA- and perhaps a few more, would have managed the mortgage assets on their own balance sheets a decade ago.
Back then, the largest banks built or bought large mortgage origination businesses, feeding into the banks' own large lending portfolios. The rise of securitization, with its liquidity and market-based risk pricing, made it economically feasible and sensible for the commercial banks to cede the portfolio lending business to a market of CMOs and, now, CDOs.
If the commercial banks had remained portfolio lenders, would this current SIV sector have reached $400B in assets? Or would the risk management functions of the banks have slowed as the mortgages began to decline in quality, hitting the sub-prime market? For example, one-time high-flying manufactured housing lender Green Tree Financial was rescued by an Indiana-based insurer, not a commercial bank.
As inept and stodgy as commercial banks can be, including their own prior mortgage lending problems which helped lead to the RTC creation to clean up the last housing finance mess, I think they perhaps exercise a bit more focused risk oversight than a widespread free market in CDOs.
While free financial markets more accurately price risk over time, they are prone, naturally, to excesses, as they swing from birth, to growth, to excessive growth, to default and contraction.
Hopefully, the long term response to this latest housing finance cycle won't be Congressional legislation which hamstrings the market with excessive and clumsy regulation. Given some time, it's likely that the market will provide its own blended solution of a return to portfolio lending by commercial banks, mixed with a modest re-emergence, in time, of securitized residential mortgage paper. And, next time, it's likely that investors will be more wary, and rating agencies will be more sanguine in the development and operation of their loss prediction models.
According to the Journal piece,
"SIVs need to find investors for $100 billion in debt coming due in the next six to nine months, even as ratings firms continue to come out with reports that lower the ratings of securities in moves that could further depress the value of SIV holdings."
Thus the targeted $100B size of the M-LEC fund proposed by the Treasury. The article further reports that SIVs have some $350B of assets, mostly in mortgage-backed structured finance paper.
Echoing my post of last week, in which I wrote,
"Let's consider what would happen if the M-LEC did not take off, and the SIVs had to wind down their investments.Some very specious assets would be sold at fire sale prices. Investors in the SIVs would be substantially wiped out. Some creditors of the SIVs, holding commercial paper, would be stiffed, too,"
The Journal opines,
"Besides tapping the superfund (M-LEC), SIVs are likely to re-structure their debt, wind down, or, in a worst-case scenario, become a dead SIV that can't pay debt investors."
Contrary to my friend's contention, in a conversation I reported here last weekend, that SIVs are levered 3-4:1, the Journal article says that most have only a 5% equity-like investment in 'Capital -notes.' This makes the leverage 19:1.
The Journal pieces continues,
"Capital-notes holders face two options: risk losing money if the SIV sells assets to the banks' fund at a loss, or try to keep the SIV going by buying more of its debt. In recent days, SIVs have been trying to persuade capital-notes holders to buy medium-term notes to fund the SIVs and protect their investments, people familiar with the matter say. Some capital-notes holders -- and SIVs -- say they are skeptical about the banks' plan, because selling assets at today's prices will require the SIV and the notes holders to recognize a loss on those investments.
The lead banks have provided little public guidance on their plans for the fund, leaving themselves open to criticism. Executives working on the fund see it not as a silver bullet but as one of several options open to SIV operators, according to a person familiar with the effort.
The plan would benefit a lead participant, Citigroup, because it is a large operator of SIVs. The SIV industry has become a key part of the U.S. economy, because the funds buy securities backed by mortgage loans to U.S. home buyers. The industry, at its peak earlier this year, totaled about 30 funds with $400 billion in assets.
The three banks have many issues to work out, according to people familiar with the situation. They need to figure out how participating banks would divide any profits or shoulder losses when the rescue fund is wound down, according to people familiar with the plan. They need to decide if participating banks will be ranked based on how much funding they provide, just as banks take lead and supporting roles in stock offerings."
These are some of the issues which I mentioned in my initial piece on this topic last week, providing more reinforcement for my views on this evolving financial services issue.
As a former Chase Manhattan corporate strategist, I can't but help muse about how these events have been triggered by the last decade's evolutions in commercial banking roles. As I wrote here, last month, concerning another article appearing in the Wall Street Journal,
"But a larger issue struck me in this piece. Maybe credit markets went too far in their evolution to total market pricing of credit and debt.
Commercial banks seem, after all, to have a few advantages that were unapparent in a consistently up-market.
Could it be that, rather than a uni-directional march toward market pricing and underwriting, credit markets are, in reality, about to swing between extremes? Moving from all-bank balance sheet valuation and warehousing, to heavily market-priced and securitized, and now back toward the original pole of bank-sourced and distributed credit instruments?
It's not something I've read anyone else hypothesizing. Even I just assumed that banks had pretty much become a mere origination platform for credit.
Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?"
The passage in Wednesday's Journal article citing the importance of the SIV sector, "at its peak....about 30 funds....$400 billion in assets," causes me to ponder how the three largest commercial banks- Citigroup, Chase, and BofA- and perhaps a few more, would have managed the mortgage assets on their own balance sheets a decade ago.
Back then, the largest banks built or bought large mortgage origination businesses, feeding into the banks' own large lending portfolios. The rise of securitization, with its liquidity and market-based risk pricing, made it economically feasible and sensible for the commercial banks to cede the portfolio lending business to a market of CMOs and, now, CDOs.
If the commercial banks had remained portfolio lenders, would this current SIV sector have reached $400B in assets? Or would the risk management functions of the banks have slowed as the mortgages began to decline in quality, hitting the sub-prime market? For example, one-time high-flying manufactured housing lender Green Tree Financial was rescued by an Indiana-based insurer, not a commercial bank.
As inept and stodgy as commercial banks can be, including their own prior mortgage lending problems which helped lead to the RTC creation to clean up the last housing finance mess, I think they perhaps exercise a bit more focused risk oversight than a widespread free market in CDOs.
While free financial markets more accurately price risk over time, they are prone, naturally, to excesses, as they swing from birth, to growth, to excessive growth, to default and contraction.
Hopefully, the long term response to this latest housing finance cycle won't be Congressional legislation which hamstrings the market with excessive and clumsy regulation. Given some time, it's likely that the market will provide its own blended solution of a return to portfolio lending by commercial banks, mixed with a modest re-emergence, in time, of securitized residential mortgage paper. And, next time, it's likely that investors will be more wary, and rating agencies will be more sanguine in the development and operation of their loss prediction models.
Tuesday, August 28, 2007
Confirmation of My Views on CDOs and Securitization
Yesterday's Wall Street Journal featured an editorial by Ethan Penner, one time Nomura employee in the mortgage banking group. Penner replaced my friend B, who had built the group some years ago.
It was very satisfying to read Penner echoing my own comments from this post, two weeks ago. Specifically, he confirms two of my contentions. First, that the manner in which differing asset types have been combined into CDOs, is far different in purpose, and effect, than the original uses of the securitization vehicles. Second, the ratings agencies played important parts in the debacle, highlighting their conflict of interest.
In one of my posts, I wrote,
"Second, to paraphrase Wilbur Ross, a self-made tycoon via conventional buying, improving and selling mundane businesses, and CNBC's guest host this morning,'when someone mentions two words, financial engineering, you know it's really an attempt to underprice risk.'
I could not say it any better. Rather than microscopically price risk correctly to the nth degree, CDOs have, instead, allowed originators to bury risk in amongst tranches of some portfolios of loans, and, in some cases, further mix them with other types of loans. That's not how the instruments were originally marketed, but that's how they now are used."
In his piece, Penner phrased it this way,
"Of course, it is very important here to distinguish between CDOs that make sense and are a healthy part of the market, and ticking time bombs that should never have been created. As an example of the former, there are those issuers, the NYSE-listed REIT Capital Trust, who utilized the CDO structure to pool their homogeneous real estate credit assets and create a financing that matched up ideally. This sort of CDO is not only sensible but an example of how securitization can help foster a healthy financial system -- creating a liability for the issuer, Capital Trust, that matches exactly the term of the assets.
On the other hand, many CDO issuers bought all sorts of assets and combined them into proverbial "witches brews" that they foisted onto the bond market, sucking out profits and fees at issuance in a game that was ongoing as long as the deals held up. The buyers of these concoctions, reliant upon the rating agencies' models, were unlikely to ever get their arms around the risks that they were asked to underwrite. How a trader would be able to traverse the various markets represented by the diverse collateral underlying these bonds to provide a suitable secondary market bid is beyond me.
My guess is that a healthy CDO market will return, but it will only be available as a source of financing to those few professional risk managers with real expertise and only for homogeneous asset pools. I have pity for bond buyers with the other type of CDOs, as it is difficult to imagine how liquidity will ever return to their holdings."
Penner also reinforces points I made in this post, the following day, regarding how the ratings agencies abetted the mortgage originators/CDO packagers. In my post of a few weeks ago, I wrote,
"Yesterday's Wall Street Journal carried a fascinating article concerning how S&P's and Moodys' rating of so-called 'piggybacked' sub-prime mortgages, in 2000, led to today's credit turmoil.
Amazingly, the ratings agencies first allowed the CDOs backed by these mortgages to be investment grade, then changed their minds last year. It evidently took five or six years for S&P and Moodys to sample and test the payment history of such mortgages, leading them to downgrade them to junk status.
Now, as Wilbur Ross said on CNBC yesterday morning, nobody should simply blame a rating agency for their own bad investment decision. And I agree with that.However, when buyers included institutions which could not buy those CDOs with today's ratings, but could earlier, you have to wonder how much the agencies' appetites for fees led them to inappropriately collaborate with the issuers, and look the other way over an obviously riskier type of home loan."
Penner seconds this by noting in his article,
"However, it's become apparent in these last months that the free market, combined with a complete dependence upon the three main bond rating agencies, may not, in its current format, be the perfect answer either.
Securitization may be the only business in the world where the appraiser is hired by, paid by, and thus works for, the seller rather than the buyer. It would be unthinkable, for example, in a real estate transaction for the seller of a property to expect that the buyer would accept a seller-provided appraisal as the basis of their valuation.
Yet, this is exactly what transpires in the bond market, where the sellers, Wall Street firms that aggregate assets and pool them into carefully "sliced and diced" securities, hires and works carefully with the appraiser, the rating agencies, to maximize their arbitrage. Importantly, appraisers at the rating agencies are paid a small fraction of the pay of the investment bankers they work with, and many aspire to work at one of the firms that they are representing, thereby creating a heightened conflict.
The potential for conflicts and misaligned incentives are more potent over time than even the best of intentions.
So, the first place one may look when tweaking the securitization model would be to re-align the interests of the governing bodies, that is, the rating agencies, more precisely with those they truly represent -- the bond buyers. There are numerous ways that this might be accomplished; suffice it to say here that a change is probably healthy and long overdue."
So true. Finally, we have confirmation from an ex-senior manager of a securitization manufacturer that the process finally went overboard. Rather than allowing the marketing of loans, suitably repackaged, to clarify risks, with concommitant returns, the process became a method for creating opaque securities with respect to risk.
Meanwhile, the ratings agencies- S&P, Moodys, Fitch- stood by and kept quiet, while accepting payment for blessing the evolving practices.
Still, as Wilbur Ross noted, shame on any investor, especially institutional investors, who try to blame the agencies and securitizers, when, as buyers, they bore the ultimate responsibility for knowing what they bought and elected to hold. Some investors will continue to find ways to make bad investment decisions, and blame the markets, regulators, rating agencies, etc. We can't really stop that. But we can at least identify the need for buyers of securities to be intimately knowledgeable about that which they are buying.
It was very satisfying to read Penner echoing my own comments from this post, two weeks ago. Specifically, he confirms two of my contentions. First, that the manner in which differing asset types have been combined into CDOs, is far different in purpose, and effect, than the original uses of the securitization vehicles. Second, the ratings agencies played important parts in the debacle, highlighting their conflict of interest.
In one of my posts, I wrote,
"Second, to paraphrase Wilbur Ross, a self-made tycoon via conventional buying, improving and selling mundane businesses, and CNBC's guest host this morning,'when someone mentions two words, financial engineering, you know it's really an attempt to underprice risk.'
I could not say it any better. Rather than microscopically price risk correctly to the nth degree, CDOs have, instead, allowed originators to bury risk in amongst tranches of some portfolios of loans, and, in some cases, further mix them with other types of loans. That's not how the instruments were originally marketed, but that's how they now are used."
In his piece, Penner phrased it this way,
"Of course, it is very important here to distinguish between CDOs that make sense and are a healthy part of the market, and ticking time bombs that should never have been created. As an example of the former, there are those issuers, the NYSE-listed REIT Capital Trust, who utilized the CDO structure to pool their homogeneous real estate credit assets and create a financing that matched up ideally. This sort of CDO is not only sensible but an example of how securitization can help foster a healthy financial system -- creating a liability for the issuer, Capital Trust, that matches exactly the term of the assets.
On the other hand, many CDO issuers bought all sorts of assets and combined them into proverbial "witches brews" that they foisted onto the bond market, sucking out profits and fees at issuance in a game that was ongoing as long as the deals held up. The buyers of these concoctions, reliant upon the rating agencies' models, were unlikely to ever get their arms around the risks that they were asked to underwrite. How a trader would be able to traverse the various markets represented by the diverse collateral underlying these bonds to provide a suitable secondary market bid is beyond me.
My guess is that a healthy CDO market will return, but it will only be available as a source of financing to those few professional risk managers with real expertise and only for homogeneous asset pools. I have pity for bond buyers with the other type of CDOs, as it is difficult to imagine how liquidity will ever return to their holdings."
Penner also reinforces points I made in this post, the following day, regarding how the ratings agencies abetted the mortgage originators/CDO packagers. In my post of a few weeks ago, I wrote,
"Yesterday's Wall Street Journal carried a fascinating article concerning how S&P's and Moodys' rating of so-called 'piggybacked' sub-prime mortgages, in 2000, led to today's credit turmoil.
Amazingly, the ratings agencies first allowed the CDOs backed by these mortgages to be investment grade, then changed their minds last year. It evidently took five or six years for S&P and Moodys to sample and test the payment history of such mortgages, leading them to downgrade them to junk status.
Now, as Wilbur Ross said on CNBC yesterday morning, nobody should simply blame a rating agency for their own bad investment decision. And I agree with that.However, when buyers included institutions which could not buy those CDOs with today's ratings, but could earlier, you have to wonder how much the agencies' appetites for fees led them to inappropriately collaborate with the issuers, and look the other way over an obviously riskier type of home loan."
Penner seconds this by noting in his article,
"However, it's become apparent in these last months that the free market, combined with a complete dependence upon the three main bond rating agencies, may not, in its current format, be the perfect answer either.
Securitization may be the only business in the world where the appraiser is hired by, paid by, and thus works for, the seller rather than the buyer. It would be unthinkable, for example, in a real estate transaction for the seller of a property to expect that the buyer would accept a seller-provided appraisal as the basis of their valuation.
Yet, this is exactly what transpires in the bond market, where the sellers, Wall Street firms that aggregate assets and pool them into carefully "sliced and diced" securities, hires and works carefully with the appraiser, the rating agencies, to maximize their arbitrage. Importantly, appraisers at the rating agencies are paid a small fraction of the pay of the investment bankers they work with, and many aspire to work at one of the firms that they are representing, thereby creating a heightened conflict.
The potential for conflicts and misaligned incentives are more potent over time than even the best of intentions.
So, the first place one may look when tweaking the securitization model would be to re-align the interests of the governing bodies, that is, the rating agencies, more precisely with those they truly represent -- the bond buyers. There are numerous ways that this might be accomplished; suffice it to say here that a change is probably healthy and long overdue."
So true. Finally, we have confirmation from an ex-senior manager of a securitization manufacturer that the process finally went overboard. Rather than allowing the marketing of loans, suitably repackaged, to clarify risks, with concommitant returns, the process became a method for creating opaque securities with respect to risk.
Meanwhile, the ratings agencies- S&P, Moodys, Fitch- stood by and kept quiet, while accepting payment for blessing the evolving practices.
Still, as Wilbur Ross noted, shame on any investor, especially institutional investors, who try to blame the agencies and securitizers, when, as buyers, they bore the ultimate responsibility for knowing what they bought and elected to hold. Some investors will continue to find ways to make bad investment decisions, and blame the markets, regulators, rating agencies, etc. We can't really stop that. But we can at least identify the need for buyers of securities to be intimately knowledgeable about that which they are buying.
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